Don't Mistake Cronyism For Capitalism

Two out of three Americans still believe capitalism is better than socialism, according to a recent survey by Rasmussen Reports, but a growing number of Americans believe America's capitalist economy is becoming corrupted by cronyism.

While the dictionary defines “crony” as a synonym for “pal” or “buddy,” the word takes on a decidedly negative tone when combined with capitalism – because, while a capitalist system is rooted in freedom, rewards talent, skill and ambition, and creates wealth and progress via competition, “crony capitalism” undermines all that. That’s particularly unfortunate because crony capitalism is too often mistaken for the real thing.

Under crony capitalism, you get a system that looks like capitalism, but marginalizes talent and ambition and replaces the dynamism of competition with one where people and businesses “succeed” based on who they know, or on the favor of government bureaucrats and powerful elected officials.

As University of Chicago business professor Luigi Zingales, author of the new book “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity," argues, the United States has traditionally had a mostly transparent form of capitalism, which “encouraged robust economic growth and contained the hunger for entitlements.” But these days, the U.S. tax code is riddled with special exemption for various industries – tax breaks that are protected by an army of special-interest lobbyists and the politicians of both parties who do their bidding. Politics, then, becomes an increasingly important element of business success, sometimes even more important than having a great idea and executing it well.

The sad reality is that instead of making money for everyone involved the way that real capitalism does, crony capitalism is better at spending money.

Whether it's the billions of dollars the Obama administration wasted on a slew of “green energy” companies with ties to the administration and to the president’s campaign donors and bundlers (according to a recent report, taxpayers will recover just $24 million of the $527 million invested in defunct Solyndra) or industries favored by Republicans like agribusiness and defense contractors, the result has not been a high-growth economy generating sufficient jobs and income growth.

Both parties are guilty. The auto industry bailout passed under President Obama was a massive crony-capitalist deal in which investors in those companies were shafted so the administration could pay off Big Labor Allies, but Obama's predecessor, President George W. Bush, created the TARP program that sent billions to big, powerful banks in response to an economic crisis in which millions of Americans lost their homes to foreclosure. Bush’s Treasury Department even went so far as to force many banks into receiving bailout funds so as to avoid stigmatism for those whose finances were so disorderly they voluntarily requested government cash.

But, whether it is millions of taxpayer dollars in cash subsidies or tax breaks for politically connected companies, crony capitalism doesn't just undermine the real foundations of a strong economy, it undermines the public’s faith that the system is fair.

In fact, people on both sides of political spectrum in America increasingly see the problem. Both the conservative Tea Party and the left-wing Occupy Wall Street movements resent the bailouts, though the two movements even though they don't agree on the solutions.

A great resource on keeping up to speed with the latest in crony capitalism is a new site recently launched called Crony Chronicles. The site is filled with examples of well-connected businesses using government laws to enrich their bottom line. Reading it for even a few minutes is sure to outrage even the most calm among us.

And yet, despite clear signs that large numbers of ordinary Americans are unhappy with the rise of crony capitalism in the U.S., the system continues to perpetuate itself, by doling out an increasing amount of subsidies, tax breaks and regulatory favors.

Cronyism is giving capitalism a bad name. Those public policy leaders who claim to advocate for the free market would do well to begin the process of stamping it out by demanding more transparency in law-making and enforcement. It’s also time to consider whether the numerous layers of regulations and agencies are actually encouraging corruption rather than eliminating it.